Ask the average person on the street to name the Motor City and most
will respond "Detroit"—except maybe in Indianapolis.
Silicon Valley is recognized as a leader in the production of computer
hardware, software and information technology services, while New York
City is home to large financial markets. Specializations or concentrations
of related industries are a widely recognized economic phenomenon and
play an important role in "branding" cities, regions and
states. Location quotients (LQ) are used in research to quantify and
compare concentrations of industries in a particular area and are critical
to understanding an area's economic strengths and weaknesses.

Location Quotients

Location quotients compare an area's business composition to that
of a larger area (i.e., nation or state). In order to determine an LQ,
a formula similar to the one shown in Table 1 is used.

Table 1: Location Quotient Equation and Rules

An LQ can be calculated for any industry where comparable data exist
for both areas. This article discusses regional economies within Indiana
and compares the Indiana Department of Workforce Development economic
growth regions (EGRs) to Indiana's statewide industry composition.

Location quotients identify export industries in an area (those industries
producing more of a good or service than is needed to meet area demand)
and import industries (those producing less than enough to meet area
demand).

Following accepted economic theory, an LQ greater than 1.0 indicates
that an area has proportionately more workers than the larger comparison
area employed in a specific industry sector. This implies that an area
is producing more of a product or service than is consumed by area residents.
The excess is available for export outside the area.

An LQ of at least
1.25 is required to consider classifying an area industry as an exporter.
Still, an LQ greater than 1.25 does not necessarily mean that an area
industry is exporting; there may simply be excessive local demand.

Identifying
area export industries (LQ > 1.25) is useful, as it provides
a measure of the degree of industry specialization within an area. A
high location quotient in a specific industry may translate into a competitive
advantage in that industry for the local economy. Economic development
opportunities may exist for additional growth of the exporting or related
industries because of the presence of an existing skilled labor pool
or other resources such as suppliers, facilities or transportation hubs
in the region.

An LQ significantly less than 1.0 may indicate an opportunity to develop
businesses in the local area to meet area demand.

Indiana's Regional Industries

Location quotients represent a good
starting point for understanding the regional economy and providing information
to support regional planning efforts. As expected, different regions
of the state have different characteristic industries; but the statewide
economy has long been dependent on manufacturing. Despite job losses
in this sector in recent years, manufacturing industries appear among
the three highest location quotients in 9 of the 11 regions (see Table
2). However, manufacturing industries do not appear among the top three
LQs for the Indianapolis area (Region 5). Manufacturing jobs remain a
core sector of the region's total employment,
but the presence of other industries is significant and diverse when
compared to Indiana as a whole.

Two of Region 5's highest location quotients fall into transportation
and warehousing (NAICS industry sector 48-49). The region has a high
LQ in air transportation (NAICS 481) and couriers and messengers (NAICS
492); air transportation maintains a high LQ of 2.59 despite major job
losses in this industry. Both of these industries reflect the region's
emphasis on being a distribution hub as the "Crossroads
of America."

Another example of a distinguishing industry is arts, entertainment
and recreation (NAICS sector 71) for Region 1. The Region 5 economy also
exhibits a marked employment concentration in this industry, but these
are the only two regions in the state with high LQs for this sector.
Region 1 includes Lake and Porter counties, among others, and is partially
within the Chicago metro area. Some major cities include Gary, East Chicago
and Portage. While the primary metals industry (NAICS 331) is still very
important to the region, the concentration in arts, entertainment and
recreation reflects the diversification of this economy away from its
traditional employment base.

Approximately half of the industries in
Indiana's 11 economic growth
regions have LQs less than one when compared to the state as a whole.
Industries with high LQs do not always employ large numbers of workers,
nor do they necessarily display net employment growth. Overall, most
regions have not realized positive employment growth within their top
three LQ industries. The most significant exception to this is the transportation
equipment manufacturing industry in EGR 2 (see Table
3).

Region
2—comprised of Elkhart, Fulton, Kosciusko, Marshall and
St. Joseph counties—has an LQ of 2.56 in transportation equipment
manufacturing (NAICS 336). This subsector has been driven mainly by the
recreational vehicle manufacturing boom in Elkhart County. This concentration
is even more pronounced when compared to the Midwest or United States.
Region 2 has a 4.08 LQ for this industry compared to the Midwest and
an astounding 9.07 when compared to the country as a whole. Other industries
that have grown at relatively strong rates include animal production
in EGR 9 (11.4 percent) and plastics and rubber manufacturing in EGR
7 (2.1 percent).

In six of the state's EGRs, manufacturing subsectors
were listed in the top three LQs twice and captured all three of the
top LQs in 3 EGRs. In Economic Growth Regions 2, 3 and 6 the top three
industry location quotients were all in manufacturing. In EGR 2, this
includes an impressive location quotient of 3.66 for wood product manufacturing
(NAICS 321). Only two EGRs had agricultural industries among their top
three location quotients: crop production in EGR 4 and animal production
in EGR 9. These regions are geographically large and contain significant
rural areas.

Geography and available resources may also explain why an industry
is prevalent in a given area. Mining (NAICS 212) has a high LQ in both
EGRs 8 and 11. These regions are in the southwestern part of Indiana
with significant deposits of coal. Coal mining is considered an export
industry, meeting the demands of an area beyond the borders of these
regions.

Location quotients are especially useful identifying both the distinguishing
industries and also the commonalities between regional economies. They
confirm the intuitively obvious (e.g. southwest Indiana's coal
mining concentration) and help tease out emerging trends as economies
change, grow and diversify (such as the development of the arts, entertainment
and recreation industry in northwest Indiana). Location quotients are
an excellent tool for economic and workforce development planners to
use in recruiting prospective employers to areas that have concentrations
of workers with transferable skills and other key resources, or in directing
them to areas where local demand is exceeding current supply of a product
or service.

Charles Baer and Terry Brown
Advanced Economic and
Market Analysis Group, Strategic Research and Development, Indiana Department
of Workforce Development